CORPORATE GOVERNANCE IN NIGERIA AND THE NEED FOR A REFORM: THE UK CODE AS A CASE STUDY

Generally, Corporate Governance being a flexible term covers a wide range of academic, government and business literature; from the debate as to who should own and control the corporation to the more pressing issue of the relationship between Shareholders and Directors (Dignam and Lowry).

The new trend for formulation of codes of Corporate Governance began in the developed economies. For example, in the late 1980s and early 1990s due to the various corporate scandals of the late 1980s in the UK such as Pollypeck among others, the journey for a better corporate governance began. The con-tinuing concerns about standards of financial reporting and accountability of Corporate Governance meant that it was imperative that the financial regulators reacted appropriately and adequately. Conse-quently, a number of committees and working groups were set up to look into the code of best practice for dealing with the Board of Directors, setting up of board committee structure, remuneration, financial reporting and relationship between the board and auditors (Cadbury Report, 1992), disclosure on the remuneration of directors (Greenbury Report, 1995), relationship between companies and institutional investors (Myners Report, 1995) and the Hampel Report in 1998 which reviewed the Cadbury and Green-bury reports. As a result of the Hampel Report which recommended a combined code (Cadbury and Greenbury recommendations), the 1998 UK Combined Code on Corporate Governance applying to all UK listed companies was finally formulated.

Following the formulation of the UK Combined Code on Corporate Governance in 1998, the UK Govern-ment has continued to ensure that the standard of Corporate Governance in the UK is continuously im-proved by setting up more committees and working groups to find viable solutions to other areas of cor-porate governance not adequately covered or completely ignored in previous reports. Thus, the Higgs Report was commissioned in 2003 by the UK government to consider the role and effectiveness of Non-Executive Directors (NEDs). Also, in that same year, the Smith Committee was commissioned by the Fi-nancial Reporting Council (FRC) to provide guidance for audit committees. The FRC in the same year also reviewed the 1998 Combined Code and incorporated the Higgs Report and the Smith Report. This culmi-nated in the formulation of the 2003 revised Combined Code on Corporate Governance.

It is important to mention that since 2003, the Combined Code on Corporate Governance in the UK has undergone and is still undergoing more reviews to continuously improve its effectiveness. It must also be mentioned that the UK Combined Code is voluntary in nature although there is a requirement in the UK.

Listing rules for listed companies to disclose the extent of their compliance of the code and explain any non-compliance. This is also known as the “comply or explain rule”.

Corporate Governance in Nigeria

Regrettably, in the 1990s, the Nigerian Banking sector experienced numerous financial scandals and setbacks as a result of poor corporate governance. Consequently, quite a number of commercial banks, financial houses and mortgage banks liquidated. This did not only lead to the loss of investor’s capital, it also had other negative effects in the general economy. As a result of these scandals, various corporate governance codes have evolved in Nigeria, although most of these codes are industry specific. These in-clude but not limited to:

▪Code of best practises on corporate governance in Nigeria 2003 issued by the Securities and Ex-change Commission (SEC);

▪Code of Corporate Governance for Banks in Nigeria post consolidation 2006 issued by the Central Bank of Nigeria (CBN);

▪Code of Corporate Governance for Licensed Pensions Operators 2008 issued by the Pension Commission (PENCOM); and

▪Code of corporate Governance for Insurance Industry in Nigeria 2009 issued by the National In-surance Commission (NAICOM).

Aside the various industry specific codes of corporate governance, the Directorate of Corporate Govern-ance of the Financial Reporting Council of Nigeria (established by the Financial Reporting Council of Ni-geria Act 2011) is saddled with the responsibility to develop principles and practices of corporate govern-ance, promote the highest standards of corporate governance and on behalf of the council, act as the national coordinating body responsible for all matters pertaining to corporate governance in Nigeria. In furtherance of this duty and following the decision of the Federal High Court in Chief Timothy Adesiyan & 9 Ors. v the Honourable Minister of Trade and Investment & 3 Ors wherein the court more or less af-firmed the powers of the FRC to issue corporate governance codes in accordance with Section 50 of the FRC Act 2011, the FRC released the National Code of Corporate Governance (2016) applicable to all sec-tors and companies (the exception being any company with 8 or less members of staff irrespective of the type of company). The said code was however suspended in January 2017 despite it only coming into ef-fect in October 2016. The code was roundly condemned due to its mandatory implementation provi-sions, which is in complete contrast with the “comply or explain rule” applicable in the UK and similar economies.

Challenges of Corporate Governance in Nigeria

Achieving an efficient and effective Corporate Governance in any economy comes with enormous chal-lenges and Nigeria is not an exception.

One of the major challenges facing corporate governance in Nigeria is the poor corporate governance culture in the Country. For example, most companies in Nigeria (public and private) are owned by few majority shareholders who also in most cases act as Chairmen of the Board and Chief Executive Officers of the companies. The Board therefore loses its independence and merely dances to the tune of the said Shareholders. In recognition of the danger that such undue concentration of power in one individual connotes, the suspended National Corporate Governance Code provided that a Board should not be dominated by an individual and that the position of the Chairman and Chief Executive Officer should ide-ally be separated and held by different persons.

The poor corporate governance culture is also exhibited in the fact that in most publicly listed compa-nies, it is the Board of Directors that determines their own remuneration, bonuses and benefits. This therefore led to situations where directors paid themselves ridiculous amount of money even at the ex-pense of the health of the Company. While the UK Corporate Governance Code admits does not place any hard limits or caps for remuneration of Directors of publicly listed companies, it provides that such remuneration should be sufficient (and no more than necessary) to retain quality individuals. It further provides that a “significant proportion” of the remuneration should be performance related. It also pro-vides that the board should establish a remuneration committee made up of non-executive directors to set pay (including pension and termination payments) for executive directors, the chairman and senior management officials. This is in a bid to ensure that Directors do not pay themselves humongous salaries and allowances at the expense of the company. The suspended National Corporate Governance Code had a similar provision.

Another example of the poor corporate governance culture can be seen from the reported violation of multiple provisions of the Bank and other financial institution Act (BOFIA) 1991, CBN Act 1991 and CBN Corporate Governance Code 2006 by a number of commercial entities either due to their disregard for these provisions or their total ignorance of the said provision. In fact, the poor corporate governance cul-ture in the country led to the failure of quite a number of banks and the CBN had to remove 13 members of the Board of a commercial bank in 2008. Furthermore, as recently as July 2016, the CBN released a Press Statement to inform the public of its decision to effect key changes on the board and management of another commercial bank.

Asides the poor corporate governance culture, corporate governance in Nigeria also have institutional hurdles to overcome in order to achieve the best result. Such institutional hurdle includes corruption, poverty, unemployment and weak enforcement of the law. There is no gainsaying the fact that Nigeria suffers from weak enforcement of the law especially with regards to the elites who are commonly treat-ed as untouchable and above the law. Thus, most companies’ window-dress their reports showing their companies are making profit and “healthy”. The companies polish their financial accounts and reports to please the shareholders and other stakeholders including investors, thereby concealing outrageous mal-practices in the company. It is these same packaged reports that are thereafter submitted to regulators. However, when the jig is up and the real state of the company is revealed, the directors of the companies are often let off with a slap on the wrist despite investors losing billions of Naira due to the weak en-forcement of the relevant Laws. This is also testament of the laxity of the regulators to ensure financial proprietary in companies.

Another institutional challenge facing the enforcement of corporate governance in Nigeria is corruption. Thus, the interwoven relationship between public regulators and the private sector wherein public office holders use private companies to launder money stolen from the public sector has gravely affected the enforcement of corporate governance codes as the bodies saddled with the responsibility of formulating and enforcing the codes are usually made up of individuals who derive huge benefits from weak regula-tory frameworks. In fact, it has been touted in some corners that the National Corporate Governance Code was suspended due to political pressure. While we would never know whether the code would have been effective, there is no disputing the fact that if it had been properly applied despite its shortcomings, it would have had remarkable effects on the corporate governance landscape in Nigeria.

Conclusion and Recommendations

Corporate governance is an important concept that has major implications for corporate performance, investors’ confidence and the efficient creation of wealth. Corporate governance issues are so important that poor corporate governance can crash a nation’s economic structure. Thus, as a result of the corpo-rate governance failures recorded in Nigeria and the world at large, attention have been drawn to the need to strengthen institutional mechanisms designed to aid the orderly growth and development of modern corporations.

The good news though is that Nigeria is not alone in the search for an efficient and effective corporate governance structure. However, while it can be argued that there is no perfect corporate governance structure all over the globe, it is indisputable that quite a number of countries have made commendable strides towards having a corporate governance structure that provides ample protection for shareholders and guarantees investors’ security and confidence. One of such country is the UK and as seen so far, the UK has taken corporate governance as a serious business and is committed to the constant reviewing and improvement of its corporate governance regime.
Nigeria therefore needs to be more pro-active in corporate governance matters. The FRC has a lot of work to do and in what appears to be a ray of sunshine, the FRC recently inaugurated a technical com-mittee for the review of the suspended National Code of Corporate Governance. The committee is head-ed by Mr. Muhammad K. Ahmad, the pioneer Director-General and Chief Executive Officer of the Na-tional Pension Commission (PENCOM). It is hoped that the inauguration of this committee will eventual-ly lead to the introduction of a revised National Code of Corporate Governance which will provide a ful-crum around which different industries and sectors can align their efforts to promote and entrench high standards of corporate governance. However, while it is commendable that a committee has been inau-gurated to review the suspended National Code of Corporate Governance, the FRC should not rest on its oars. There is a need for effective enforcement of corporate laws as well as judicious application of sanc-tions without prejudice.

Lastly, one of the key features of the UK corporate governance code is the protection of whistle blowers. There is an independent bureau created by the government where whistle blowers can report corporate malpractices and in turn, among others, have their identities concealed. The suspended National Corpo-rate Governance Code provides that every company is required to have a whistleblowing policy which will encourage stakeholders to report unethical conduct and violations of any laws or policies to an inter-nal and/or external authority, so that such conduct /violation can be thoroughly investigated, verified, and appropriate sanctions applied to serve as deterrence potential reoccurrence. It is hoped that the re-vised code will incorporate a similar provision and that such provision would be strictly adhered to.

FOLA JAIYESIMI (PARTNER) fj@gavelsmithslaw.com

TOBI AYANLEYE (ASSOCIATE) oa@gavelsmithslaw.com